Rio Tinto Ltd (ASX: RIO) shares could be in the buy zone following the miner's quarterly update.
That's the view of analysts at Goldman Sachs, which were pleased with the company's performance during the three months.
What is the broker saying about Rio Tinto's update?
While the broker acknowledges that the quarterly update was soft, this was due to seasonal factors and was largely expected. In light of this, it was pleased with Rio Tinto's stronger than expected copper production. It said:
RIO reported a seasonally soft March Q, and while most divisions were down QoQ, copper and bauxite were up by >10% PcP. Extreme wet weather (cyclones) impacted Pilbara iron ore shipments (~71Mt, -9% PcP, and -4% vs GSe), while consolidated copper production was better (210kt, +6%/+5% vs. GSe/Visible Alpha Consensus), primarily driven by better grades at Escondida and better plant uptime despite the multiday impact from the Chilean power outage in late Feb.
While there was no change to 2025 production, cost and capex guidance, Pilbara volumes are now guided to the lower end of the 323-338Mt range (GSe already at low end at 324Mt).
5 reasons to buy Rio Tinto's shares
Goldman Sachs remains very positive on Rio Tinto and its shares and has named five reasons to buy them.
These are its relative valuation, attractive free cash flow (FCF) and dividend yield, strong production and EBITDA growth over the medium term, the Pilbara turnaround, and its compelling high margin low emission aluminium exposure.
In respect to its valuation, the broker said:
[Rio is] trading at ~0.65x NAV (A$169/sh) vs. peers (BHP ~0.7x NAV and FMG ~1x NAV) and ~5.2x NTM EBITDA at GSe base case, below the historical average of ~6-7x.
As for its FCF and dividend yield, Goldman expects the miner's exposure to copper to support both. It adds:
FCF/dividend yield of ~6% in 2025E and ~7%/~6% in 2026E, driven by our bullish view on aluminium and copper (~45-50% of group EBITDA by 2026). Despite both RIO & BHP spending around ~US$10-11bn p.a., we expect RIO to widen the production (Cu Eq) and FCF gap over BHP over the next 5yrs. Based our 12m price targets, RIO.AX has greater upside (30%) vs BHP.AX (25%) (both Buy-rated).
Overall, the broker has reaffirmed its buy rating with a slightly trimmed price target of $140.80.
Based on where Rio Tinto shares currently trade, this implies potential upside of 30% for investors over the next 12 months.
